USA Today publisher
Gannett Co.
is nearing a deal to combine with rival GateHouse Media, people familiar with the matter said, a move that would join the nation’s two largest newspaper groups by circulation at a time local media is in a battle for survival.

The companies are grappling with a brutal environment for local newspapers around the country. Private-equity-backed GateHouse has a reputation for aggressively slashing expenses at titles it acquires.

Local papers have suffered particularly sharp declines in circulation compared to national outlets as readers look elsewhere for news and classified ads disappear. They have also lost more of their online-advertising business to tech giants such as
Facebook Inc.
and
Alphabet Inc.
’s Google.

Nearly 1,800 newspapers closed between 2004 and 2018, leaving 200 counties in the U.S. without a paper and roughly half the counties in the country with only one, according to a University of North Carolina study. That has stoked concerns that a crucial source of reporting around the country is being starved.

These trends have sparked consolidation and prompted financial investors to hunt for bargains as they accumulate empires that can benefit from economies of scale—derived in large part from layoffs.

GateHouse and Gannett are discussing a cash-and-stock deal in which GateHouse’s parent would likely buy Gannett and GateHouse Chairman and Chief Executive
Mike Reed
would assume the same roles at the enlarged entity, according to the people familiar with the matter.

Gannett has been without a permanent chief executive since May, when former CEO
Robert Dickey
retired. He had led the company since 2015, after Gannett split its newspaper-publishing business from the company’s broadcast-television stations.

Since the split, factors buffeting the industry have eaten away at the company’s value. Gannett’s shares have lost nearly half their value as the company struggled to develop a strategy to revive its sagging fortunes. Gannett made a failed attempt a few years ago to buy the Chicago Tribune’s publisher, now known as
Tribune Publishing Co.

It couldn’t be learned what the price of a deal with GateHouse might be. Gannett shares closed at $7.90 on Thursday and rose nearly 8% after hours when The Wall Street Journal reported that a deal between the companies might be close. One could be announced in the next few weeks assuming the talks don’t fall apart, the people familiar with the matter said.

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New Media is smaller than Gannett, with a market capitalization of about $550 million compared with Gannett’s roughly $900 million value, although it has deep-pocketed backers. New Media is operated by private-equity firm Fortress Investment Group LLC, which is owned by Japanese telecommunications-and-investing giant
SoftBank Group Corp.
9984 3.20%

Gannett has also recently considered a deal with Tribune, but determined a combination with GateHouse would provide more opportunities to cut costs—ultimately as much as $200 million a year, or roughly twice what a Tribune tie-up could yield, some of the people said. That would be an unusually big number for a deal of this size, likely reflecting GateHouse’s belief that a big chunk of overlapping costs are ripe for cutting.

It is likely that a substantial portion of synergies would stem from layoffs, but also from other factors such as consolidating printing presses.

A merger would give Gannett a far wider geographic footprint to sell digital advertising through its USA Today network and help speed the companies’ reorientation away from print.

Together, Gannett and GateHouse publish some 265 daily papers.

GateHouse is currently the largest newspaper publisher in the U.S. by titles owned, with 156 dailies and 464 weeklies, most of which are in small markets. It is No. 2 by circulation, behind Gannett, which owns 109 dailies including the Arizona Republic, Milwaukee Journal Sentinel and Indianapolis Star—in addition to its flagship USA Today.

GateHouse has been on a buying spree recently, spending close to $1 billion in recent years acquiring dozens of small and medium-size papers around the country—including the Palm Beach Post and the Austin American-Statesman.

Gannett earlier this year rejected a $12-a-share buyout offer from Digital First Media, partly on the grounds that it didn’t appear to have credible funding, and later defeated Digital First in a proxy fight for board seats. Digital First’s hedge-fund backer had built a 7.5% position in Gannett’s stock and argued that the company was being mismanaged and should consider its offer or look for another buyer. The hedge fund, Alden Global Capital LLC, has since cut that stake to 4.2%, according to FactSet.